Our highlighted article of the month, TOD or Living Trust?, reviews two simple methods for shielding assets from probate. A Revocable Living Trust is a very effective vehicle used to transfer assets without being hampered by the probate process. They require more work establishing them initially, but once they are setup and funded, they do not require a lot of maintenance. As stated in the article, upon death they become irrevocable and pass to your listed beneficiaries directly. However, an annual or biannual review of the trust document is recommended in case your goals, desires or family changes. As is expected, when the trust becomes irrevocable, it is too late to make adjustments, so a little regular attention is warranted.
A Transfer On Death (TOD) designation can be added to existing non-qualified assets in order to facilitate an easy process of distribution from the owner to their beneficiary too. Beneficiary designations on retirement accounts such as IRAs, 401(k)s and annuities effectively perform a similar function. They are easy to implement and easy to execute when the time comes. The problem I have witnessed is that TOD and beneficiary designations are easy to mess up too. In order to keep them accurate, one has to understand that they take precedent over the Will. Many times that point is misunderstood or forgotten. An easy fix is to review designations during your review to ensure that they match up with your goals and desires. You don’t want to leave anyone out, expecting them to receive their portion in the Will, because they will not. And as the article mentions, perhaps the other beneficiaries may be willing to equal things out, but perhaps not.
A look at two basic methods for shielding assets from probate.
How do you keep assets out of probate? If that estate planning question is on your mind, you should know that there are two basic ways to accomplish that objective.
One, you could create a revocable living trust. You can serve as its trustee, and you can fund it by retitling certain accounts and assets into the name of the trust. A properly written and properly implemented revocable living trust allows you to have complete control over those retitled assets during your lifetime. At your death, the trust becomes irrevocable and the assets within it can pass to your heirs without being probated (but they will be counted in your taxable estate). In most states, assets within a revocable living trust transfer privately, i.e., the trust documents do not have to be publicly filed. 1
If that sounds like too much bother, an even simpler way exists. Transfer-on-death (TOD) arrangements may be used to pass certain assets to designated beneficiaries. A beneficiary form states who will directly inherit the asset at your death. Under a TOD arrangement, you keep full control of the asset during your lifetime and pay taxes on any income the asset generates as you own it outright. TOD arrangements require minimal paperwork to establish. 2
This is not an either-or decision; you can use both of these estate planning moves in pursuit of the same goal. The question becomes: which assets should be transferred via a TOD arrangement versus a trust?
Many investment & retirement savings accounts are TOD to begin with. The beauty of the TOD arrangement is that the beneficiary form establishes the simplest imaginable path for the asset as it transfers from one owner to another. The risk is that the instruction in the beneficiary form will contradict something you have stated in your will.
One common situation: a parent states in a will that her kids will receive equal percentages of her assets, but due to TOD language, the assets go to the kids not by equal percentage, but by some other factor, with the result that the heirs have slightly or even greatly unequal percentages of family wealth. Will they elect to redistribute the assets they have inherited this way (in fairness to one another)? Perhaps, and perhaps not.
How complex should your estate planning be? A conversation with a trusted legal or financial professional may help you answer that question and illuminate whether simple TOD language or a trust is right to keep certain assets away from probate.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – investopedia.com/articles/pf/06/revocablelivingtrust.asp [3/7/2019]
2 – investopedia.com/terms/t/transferondeath.asp [4/25/2019]